The Revealing Difference of Investing Your Money and Saving It

Note: I am not a financial advisor. You are trading at your own risk and should consult a financial advisor for any investment decisions. Do your own due diligence when considering investing, and this information is for education/informational purposes only. The article “The Revealing Difference Of Investing Your Money And Saving It” and “difference between savings and investment” serves as educational content, not investing advice.

Today I want to take some time to discuss the differences between savings and investment regarding investing money for long term goals. In fact, what you’ll find is a big difference, but just let the graphics display that for you.

It seems most often that people choose to have their money into savings accounts rather than an investment account because maybe they are unaware of what to invest in, how-to, or another personal reason.

Well, let me state that it’s not incredibly difficult to start investing for what it’s worth. Sure it seems very difficult, but you don’t have to make that many decisions yourself. Advisors or robots can do that for you.

But maybe everyone doesn’t realize the impact that was just simply saving money into a low-interest account will lose in the long run. Yes, I’m talking about inflation, and yes, people may be tired of hearing about this. Yet, this does remain to be accurate, and I’ll show you more below.

Difference between saving and investment

Let me explain the difference between saving and investment. When we think of money, saving money is holding or storing money that has been earned into a particular account or just in possession. We are all likely familiar with the idea of saving money and believe me, I do think that it can be a good thing.

According to the Cambridge English Dictionary, the word investment means “the act of putting money, effort, time, etc. into something to make a profit or get an advantage, or the money, effort, time, etc….”

I think that clears it up pretty well. So, we can describe the difference between saving and investments in that to save money is to hold it for future use or to prevent its use, while investment Is the use of money to potentially earn more.

These have clearly two different objectives, but even in some cases, people may save money to invest in their retirement, maybe by holding a high-interest savings account. One that’s perhaps offered by the Canadian Tire Bank (your cue for you to check out my article on it).

A Look at Returns a Savings Account Could Yield:

To determine this, we need to understand what the interest rates could yield for an individual. The interest rates will differ from each bank but likely will be similar. For the use of this article, I will reference a savings account that yields 1.25% yearly.

This is the interest rate you could earn through the Canadian Tire Bank’s high-interest savings account.

So, let’s set up a hypothetical situation.

Savings Account Example

Here again, we have our buddy, Serge. Serge decides that he wants to contribute an extra $1,000 into a savings account every year from here on out. He decides that he will do this for 30 years in hopes that he will be able to retire by then.

So, here’s what we know:

  • The beginning amount will be $0 since he has not contributed anything initially, only will contribute the yearly amount
  • The average annual return will be 1.25%
  • The maturity is 30 years
  • Annual contributions is $1,000.

Here’s a breakdown of the returns within the first 3 years, 5 years, 10 years, 15 years, 20 years, and 30 years.

Year:Beginning Amount:Annual Contribution:Interest:Ending Balance:
3$2,012.50  $1,000$25.16$3,037.66  
5$4,075.63$1,000$50.95  $5,126.57  
10$9,463.37  $1,000$118.26  $10,581.67  
15$15,196.38  $1,000$189.95  $16,386.33  
20$21,296.77  $1,000$266.21  $22,562.98  
30$34,695.38  $1,000$433.69  $36,129.07  

That means, over the 30 years, Serge only earned $6,129.07, or just a little more than $6,000 in interest. His return, considering the $30,000, has only been a little more than $6,000.

Here’s a graph of the increasing values over the 30 years:

To me, that isn’t very ideal, considering one would want a decent return for their retirement or any other long-term goals they may have.

Now, let’s look at this from another side.

Let’s count inflation into this factor. For this example, I’ll assume that inflation is an average of 2% a year. It could be more. It could be less. For the record, it’s just an estimate.

Now, inflation eats at an investor’s returns because it eats away at the value of their investment over time. That’s because inflation increases prices over time, which decreases the purchasing power consumers have.

So, now our average annual return is -0.75%. How is this calculated? Well, simply put, you take the average annual return and subtract it from the average annual inflation. In this example, it’s 1.25% – 2%.

I’ll use the same periods to look at the results of this investment’s performance:

Year:Beginning Amount:Annual Contribution:Interest:Ending Balance:
3$1,992.50    $1,000-$14.94  $2,977.56    
5$3,955.22  $1,000-$29.67    $4,925.56
10$8,734.67    $1,000-$65.50    $9,669.16  
15$13,337.56  $1,000-$100.02    $14,237.53  
20$17,770.41    $1,000-$133.28    $18,637.13  
30$26,150.88    $1,000-$196.14    $26,954.75

What’s the most significant difference? Well, the difference is that Serge is losing money over time. The returns you earn are always negative, despite the that the amount is still increasing. But let’s put it this way, of the $30,000, Serge has lost just a little more than $3,000.

Another graph:

But maybe a more critical graph is the one looking at the differences between both situations:

And a table looking at the differences among the same periods:

Year:The difference in Ending Balance:

So, this clearly highlights the losses that Serge would earn if he chose to save for retirement at 1.25% of annual interest.

With that said, let’s look at the alternative if Serge invested in a short term fund or some mutual fund investments.

Investment Calculator:

In this example, let’s say that Serge invests in a moderately risky index fund. Little does he know, but the fund will provide an average annual return of 5%.

Like in the situation above, he invests $1,000 every year up to $1,000 in the hopes he will have enough for his retirement.

Here’s what we know:

  • The beginning amount will be $0 since he has not contributed anything initially, only will contribute the yearly amount
  • The average annual return will be 5%
  • The maturity is 30 years
  • Annual contributions is $1,000.

Let’s breakdown the data into the periods used previously:

Year:Beginning Amount:Annual Contribution:Interest:Ending Balance:
3$2,050.00    $1,000$102.49  $3,152.50      
5$4,310.13  $1,000$215.50  $5,525.63  
10$11,026.56    $1,000$551.33      $12,577.89    
15$19,598.63$1,000$979.94      $21,578.56    
20$30,539.00  $1,000$1,526.95      $33,065.95    
30$62,322.71    $1,000$3,116.13      $66,438.85  

In 30 years, Serge will have accumulated over $65,000 from his investment, which is pretty impressive if you ask me. 5% certainly beats out the 1.25% that one would clearly earn through a savings account.

Of course, countered with inflation, the average annual return is 3%, but I won’t go through a set of data as well. My point is getting across here. I’m not sure you’d want to read through more data either, so win-win.

Comparison Between two investments:

Let’s look through some of the data.

Year:The difference in Ending Balance:

A simple rule in investing is that the longer you hold something of value, the more likely it will increase. Although that’s not always the case, in this situation, it clearly is.

But imagine that there’s $30,000 in the difference between these annual average returns! Now talk about that being such an enormous difference.

Yet, this is the whole point. To display how an investment can be much better than simply relying on a savings account.

Not that there’s anything wrong with a savings account, but as Rich Dad Poor Dad once stated, “Savers are losers.” And in the case of long-term investors, this is the case indeed.

Here’s the difference via a graph.

Is a tfsa better than a savings account?

Why include a question like this in this article? Well, this question works perfectly with what I’m trying to explain here.

I’m also going to provide a biased answer. I think that the TFSA is much better than a traditional savings account. For one, you can hold securities or debt in the account, which means you can possibly earn a higher annual rate than you would with a traditional savings account.

As well, all the income that you generate within the account is tax-free. Yes, so even if you were to hold a high-interest TFSA, the interest earned is simply tax-free.

Whereas in a traditional savings account, any of the interest generated from the account will simply be included on personal tax returns, increasing the tax one may pay.

I mean, I’m just such a massive fan of TFSAs, but I personally likely wouldn’t hold one with a bank. This is because I am not interested in investing in an account with just an introductory interest rate. Again, this rate won’t beat inflation and caps my potential for earnings in the future.

I’d rather bet on something that potentially could have a very high or unlimited earning potential.

But I do understand why someone may choose a savings account over a TFSA.

An advantage of a savings account is that you can contribute as much as you like. With a TFSA, there clearly is a limit on what can be contributed yearly and in a lifetime. So hey, maybe one could earn more through a savings account than a TFSA. But I’ll take my chances.

is saving or investing better?

Well, if this question is directed towards me, I’ll definitely have to answer investing.

Who doesn’t ideally want a more significant return on their investments? I’m sure no one would refuse a more substantial yield when given the opportunity, rightfully so, of course.

But I certainly understand why some people choose to invest in a savings account rather than invest their money. Risk.

Risk can be a dangerous thing, because well, you could lose all your money. Or at least a significant portion of it.

Without risk, there can be no reward, though. Even then, there are plenty of investments out there that are more conservatively based than extremely risky.

Whatever your risk tolerance is, I bet there is a correlating investment that might suit your needs.

Even then, if it is low, just have a look at the examples I mentioned above. $30,000 could simply be the difference. Hell, it could even be higher.

Then there’s the chance it could be lower or even zero in the difference.

But the leap to make this type of investment is sort of scary. What if it does go to zero? There’s always the chance the stock market is not very friendly with you.

Yet, whenever I’m faced with this question, I try not to worry over it. If I’m investing in the long-term, I will have faith that my investment will increase over that time. I simply won’t stress over short-term fluctuations.

And even if you’re worried, there are professionals out there who want to help you earn returns based on your risk tolerance, so you can put the worry over to them and their knowledge.

Concluding Remarks:

Yet, at the end of the day, this is all a personal answer and choice.

And I’m really not sure what to say that could convince you to take some more risk. Nor would I really want to convince you of doing so.

This all has to be a decision from you to want a better chance to earn better returns.

Instead, this article is to highlights the difference between investing and saving in the long run. I think I have done that, and hopefully, it encourages you to do more research to determine what is the best for you and your financial goals.

Could any mutual funds yield 1.25%? There’s an absolute chance that these investments will yield the same amount that can be earned via interest rates through accounts with commercial banks.

Also, be careful with those credit cards during this time of year! It can truly be a dangerous financial time of the year.

Remember, if you have any questions at all, please don’t hesitate to reach out to me anytime via Instagram or email under the contact us page.

At the very least, I hope this helped you or opened your mind to what investing can be and how it can be better than saving. It may be scary, but as we know, it can be completely worth it.

Here’s to a great rest of the year, full of green, no red, and excellent wealth management.